Fortescue ponders assets sale

Fortescue Metals Group
is considering asset sales to shore up its balance sheet in a move that could make it easier to convince its banks to give it breathing space on debt obligations.

The Perth iron ore miner halted trading in its shares until Tuesday morning to complete talks with its lenders about a restructuring of its debt facilities after The Australian Financial Review revealed it had asked its lender to waive all debt covenants for 12 months.

It is understood Fortescue has told lenders it is not relying on a near-term rebound in the iron ore price as a solution to its problems.

It is believed management is considering several asset sales to raise additional cash – including the potential sale of a minority stake in future hematite iron ore developments – rather than equity raising that would dilute founder and chairman
Andrew Forrest
’s 32 per cent stake.

It is unclear whether potential asset sales includes the Kings project at its Solomon hub, which could produce 40 million tonnes a year and was recently delayed by at least three months as part of Fortescue’s move to conserve cash.

One analyst suggested that based on the price received by Gina Rinehart for the sale of minority stakes in her Roy Hill project, Fortescue could obtain as much as $US2 billion for selling a 25 per cent stake in Kings to a major customer like China’s Baosteel. Such action would take approval from the highest level of the Chinese government, which could take time.

A portion of the proceeds could be used to pay down debt, with the remainder put towards completing the development which will help lower the miner’s overall production costs. Fortescue recently delayed Kings as part of an effort to conserve $US1.6 billion of cash this year, and as a result it will expand only to 115 million tonnes rather than 155 million tonnes.

“Andrew is probably at the moment carrying a bit too much debt," West Australian Premier Colin Barnett said of Mr Forrest yesterday. “But that is the nature of Andrew. He does a high-wire act."

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In recent weeks, Fortescue has publicly canvassed the prospect of selling a stake in its undeveloped lower-grade Northstar magnetite project and its accommodation units, airstrips, more power stations and water facilities but has not mentioned the prospect of selling a stake in its hematite projects.

Other options include the potential to sell a minority stake in its railway line to QR National or another player. QR National is understood to not be in talks with Fortescue, but hasn’t ruled out the prospect of cutting a deal. Fortescue is also said to have previously canvassed additional sales and lease-backs of equipment with Kerry Stokes’s Westrac.

CBA said FMG should raise $US2 billion of equity, but the miner’s position of an equity raising being a last-ditch option appears unchanged. Depending on the iron ore price, which fell $US2 a tonne to $US96.10 a tonne on Thursday, analysts expect Fortescue to be at risk of breaching its loan covenants as early as December.

The key covenant is the need for cashflow to be a 2.5 multiple of fixed charges, including interest payments and dividends. Asset sales would allow the miner to reduce its debt load, but would not be treated as cash flow.

Goldman Sachs said it believed the iron ore price was still a bigger issue for Fortescue than its debt covenants. “We think it is likely that the company obtains waivers from the banks for a higher fee on its facilities," the broker said.

“There is a chance that the banks demand security. We think it is possible that the banks demand an equity issuance along with any covenant waiver, but we think this would be positive for the bonds. Ultimately, though, we do not think maintenance covenants will be the demise of this company."